Schadenfreude Warning: "Karen the Supertrader"
- Thread starter Niten Doraku
- Start date
CTAs are members of NFA are are being audited by them ever 2 years.
What I learned from you folks and Karen is very valuable: her over leverage created the huge losses:
I went back and look at naked 5 delta (her criteria) short puts on SPY that expired in ~50 days. I would collect ~$0.5, if SPY dropped ~10%, the 5 delta became ~50 delta and the puts became ~$5. If I committed 50% of my fund and used PM, margin calls came in no time. I have no clue how to get out of that without a loss.
If I didn't leverage, my puts would all expire worthless and I made money.
The important part you are missing is that the market snapped back which is easy to backtest against.
When the market is down 10% how do know it will come back?
On Oct 14, Aug 24/15 and Feb 11/16 if you were live trading you have no idea what would happen the next day. In all 3 dips we got lucky and the market bounced back.
But what if it didn't? What if it dropped another 10-40% which is well within the realm of probabilities. Remember there have been two drops of 50% in the past 16 years. A 10% drop is barely a blip historically.
Would you have survived if the market kept dropping?
If you were selling naked puts in 2008 you got slaughtered. If you were selling put spreads you still would have realized a maximum loss.
The only way to avoid it is to have hedges that kick in during a crash. The problem is hedges cost money and done incorrectly won't provide protection.
The only other thing to do is accept these events as inevitable and trade less which has the same effect as hedges which is a lower profit.
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Things may have changed in the last few years, but if I remember correctly the only way to exempt yourself from any regulation was to limit your investors to Qualified Eligible Persons (QEPs). Even then, there is some level of scrutiny.
All excellent points. Hind sight is always 20/20.
I would not have known if it was live and probably would panic and got out before recovery.
Duke, I've been in this game for a very long time. The last two years have been so quiet and so dead in the markets. You really can't measure something that small as significant. You generally would like to have about 1000 data points to get meaningful results from anything. If you have been doing this for 2 1/2 years you might have 30 data points which honestly man, is a rounding error. Trust me, the FED has turned this market into an eerily quiet ocean where the storms are off in the distance but completely out of sight. All this means is that when they come, and they will, they will come with such brute force that there will be few survivors.
It one thing cutting your losses with a 10 Lot, but when your fund has $200 - $300 million and you have made some bad decisions before a market move that you didn't anticipate, its a totally different ball game
I beg to differ...I'm not going to argue with you that they haven't been on the level of 2000 or 2008, but this market has seen a series of 15-20% rallies and declines (a few very sharp and sudden moves - Aug 24, 2015 & early-mid Jan 2016)...Where I agree is that the Fed has stepped in either via backdoor agreements of "open mouth operations" to keep things from progressing to the level of those other two episodes...Unfortunately, the more they "condition" the market to expect a neverending series of monetary dovishness, the worse the outcome...so I completely agree with you there.